3 big questions remain as net neutrality heads to the end game

The FCC has scheduled a February 26 vote on net neutrality, touching off a final flurry of debate over how the agency should oversee the internet. The home stretch will be dominated by politics, public perception and, just maybe, by Google.

The policy positions are clear enough: consumer advocates, and most Democrats, believe the FCC should invoke so-called “Title II” provisions that would require broadband providers to treat websites alike, and stop them for creating special fast lanes for certain sites. The telecom industry, supported by Republicans, counter that such net neutrality rules could harm innovation.

But certain wildcards make the final outcome hard to predict. Here are three unresolved questions to watch in coming weeks:

How far will Republicans go to stop Title II?

A spate of stories in the last week, particularly in the Wall Street Journal and Politico, suggest the GOP could respond with a burn-it-down approach if FCC Chairman Tom Wheeler dares to reclassify broadband providers as public utilities under Title II. The threatened retaliation includes budget cuts to the FCC, new legislation to stamp out Title II or obstructionist antics to prevent Wheeler conducting an important spectrum auction. It’s unclear, however, if the Republicans would actually go through with all of these measures — or if Title II opponents are just raising them in the media as a way to intimidate Wheeler and net neutrality supporters into backing down.

The legislative threats, for instance, may be hollow since President Obama wields a veto pen for two more years, and he has made clear he supports Title II. Meanwhile, a move to scuttle the planned auction could backfire in light of the fact that a recent spectrum sale raised an eye-popping $45 billion for the federal government: would Republicans really forgo that type of money simply to stick it to Wheeler?

But given the increasingly ideological tenor of the debate, anything could happen between now and early February, when Wheeler’s final proposal is likely to be leaked.

What does the public believe (and do they care)?

Republicans have been attempting to equate net neutrality with over-regulation and bumbling bureaucrats. If such rhetoric proves persuasive, it will give Title II opponents the upper-hand in the public debate since policy decisions that smack of big government are unpopular with the public. (It’s true that Title II wouldn’t necessarily be a burden due to so-called forbearance rules, but these sort of details are typically too arcane for political sound bites).

On the other hand, Republicans’ position makes them standard bearers for the likes of Comcast, AT&T and Verizon — companies that oppose Title II, but that are also deeply, deeply unpopular with the American public. This means Democrats and net neutrality debates could sway the debate if they can frame Title II as pro-consumer, rather than as government meddling with markets.

Finally, the outcome will turn on how many people are paying attention in the first place. While the issue has gripped Reddit readers and parts of the Beltway, it’s unclear how many average voters know or care about net neutrality in the first place. The issue gained brief traction last fall thanks to comedian John Oliver and an “internet slow down” day, but that has been waning (the momentum could change again, however, if the topic pops up in the President’s State of the Union address on January 20)

Will Google get on board?

The last time the net neutrality debate crested in 2011, Google was front and center. This time, the search giant is sitting on the sidelines, offering only vague support for net neutrality, and leaving relative small fish like Netflix and Etsy, which lack any real lobbying clout, to lead corporate opposition to Comcast and the rest of the telecom industry.

But last week, Google signaled it might step into the fray after all. In a filing with the FCC, the company pointed out that the agency could use Title II to oblige incumbents to grant access to utility poles and other infrastructure. In practice, this would make it much cheaper for Google to deploy its Fiber technology — and increase the competition for broadband.

While the filing falls short of a full-throated endorsement for Title II, it does provide the FCC with new ammunition if it chooses to defy the telecom industry. And if Google does decide to go all in, its endorsement would likely prove to be a game-changer, leading to a shift in lobbying power, and causing the rest of the tech sector to follow suit in favor of Title II.

As Comcast merger enters final phase, deal may be on thin ice

When telecom giant Comcast announced plans in February to swallow its largest rival, Time Warner Cable, the consensus in Washington and on Wall Street was that regulators would let the deal go through. Now, as the final phase of an FCC comment period draws to a close, all bets are off.

Recently, views of the merger have shifted amid growing public concern over the state of U.S. broadband, which is rapidly eclipsing pay TV as consumers’ go-to source for entertainment and information. Meanwhile, Comcast’s rivals have gained momentum in their quest to stop the deal.

The final outcome of the review process involves many wild cards — from the fate of net neutrality to Republican control of Congress — but it’s safe to say for now, based on evidence and experts, that the merger’s chances of passing are lower than they were a few months ago.

A new skepticism

A shift in sentiment over Comcast’s proposed merger has been reflected in both stock market activity and by the behavior of the deal’s opponents.

Investors’ doubt about the merger’s fate can be seen in the fact that share prices of [company]Comcast[/company] and [company]Time Warner Cable[/company] are still valued as if the companies are separate entities. As the New York Times noted in November, the adjusted share price of two firms should move toward the same value as the close of the merger approaches — but that is not happening.

Corporate opponents, such as Netflix and smaller telecom firms, have recently ramped up their lobbying game, and launched a new anti-merger campaign.

According to sources in Washington, the fact these companies are bankrolling new initiatives like “Stop Mega Comcast” so late in
the process reflects a newfound hope that the FCC or the Justice Department will block the deal. This is a contrast from the summer when merger opponents sometimes conceded in private that they viewed Comcast as too big and too well-connected to stop.

These developments are evidence of the growing skepticism over the deal’s prospects, but they don’t describe the underlying reasons for that skepticism. Those reasons are rooted in evolving views over how regulators should examine the antitrust issues that led to a review of the deal in the first place.

When the deal was announced in February, Comcast sought to preempt antitrust objections by promising that it would divest some cable TV subscribers in order to ensure the combined company would have less than 30 percent of the U.S. market — thereby quelling concerns about monopoly.

The problem is that the monopoly fears surrounding the deal don’t just stem from its potential effect on the cable TV market.

big dog

Bully for broadband

“What makes Comcast unique is its power in three different facets — as a programmer, a distributor and an ISP,” Maurice Stucke, an antitrust professor at the University of Tennessee, told me in a recent interview.

According to Stucke, who opposes the merger, Comcast has tried to frame its proposed acquisition of Time Warner Cable through the lens of cable distribution and downplay other dimensions of the deal, especially its potential effect on the market for internet services.

Stucke suggests the combined company would have an unrivaled ability to leverage its broadband connections in order to get exclusive online deals from content providers, or to give special treatment to some websites over others.

In practice, this would see Comcast and its X-1 set-top box acting as a new type of master gatekeeper, determining which apps and websites can be easily accessed by consumers. Indeed, there are signs this is happening already.

[pullquote person=”Maurice Stucke, University of Tennessee professor” attribution=”” id=”902775″]”What makes Comcast unique is its power in three different facets — as a programmer, a distributor and an ISP.”[/pullquote]

Earlier this year, Comcast demanded that Netflix pay tolls to prevent its internet stream from being degraded. In the future, critics fear, a merger would make it easier for Comcast to exercise the same sort of control over a wide range of other over-the-top internet services, including a standalone HBO. Comcast could one day control online entertainment options in the same way that it currently controls TV channels.

Such fears have led merger opponents to say the FCC or the Justice Department should step in not because of cable TV concentration, but to ensure that Comcast can’t monopolize broadband-based content.

The actual amount of control that a combined Comcast–Time Warner Cable would wield over the internet is in dispute. Comcast claims the merger will not give it a commanding slice of the broadband marketshare, while critics warn the merger will hand the company control of over half the residential high speed connections in the country.

The question now is what the FCC will conclude, and how both the agency and the Justice Department will respond.

So far, FCC Chairman Tom Wheeler has been clear that he believes the U.S. needs more and faster broadband, and that competition is the key to achieving this. This could bode ill for Comcast’s merger plans if Wheeler agrees that the deal is indeed about internet service, not cable TV.

At the same time, Wheeler will have to contend with Comcast’s contention that internet competition should not be defined only by conventional connections, but by other forms of internet access like fiber, next generation DSL or over-the-air offerings from phone carriers and others.

“Anyone who tells you what the future of broadband holds is shooting in the dark. We’ve seen time and again people’s inability to predict what will happen in the real world,” said Christopher Yoo, a law professor at the University of Pennsylvania, who argues that the FCC should leave broadband build-out to the market and let the merger go through.

Entrepreneur Mark Cuban has likewise expressed concern that the FCC might do more harm than good by taking a hands-on role in promoting broadband. Others, however, point out that many consumers have only one realistic option for high speed-broadband and that a Comcast merger would result in these de facto monopolies becoming more entrenched.

comcast_xbox

Picking battles

Comcast’s proposed merger is facing an unprecedented level of opposition, which will grow more shrill in the wake of a final round of comments that poured in this week from competitors and public interest groups. Meanwhile, a new filing foul-up by Time Warner Cable has forced the agency to slow down the review process for a second time, and the longer the review process drags on, the less likely it will succeed.

While the momentum is on the sides of the opponents, the overall merger process itself is tied not only to the broadband debate, but to the greater game of the FCC and Washington politics. In this context, Chairman Tom Wheeler must take account of an incoming Congress that will be controlled by Republicans, many of whom support the merger.

While the FCC is an independent agency and Wheeler controls three of the five necessary votes to make decisions, any sign that he intends to block the merger could result in a partisan backlash in the form of threats to the FCC budget or a series of subpoenas. People who know Wheeler say he would find the latter possibility — in which he would have to sit before grandstanding minor-league Republicans — especially irksome.

The threat of partisan obstruction also has implications for the FCC’s other agenda items, including a major spectrum auction that Wheeler regards as critical to the country’s broadband future and that he hopes to make part of his legacy. A political blow-up with Republicans could make the auction harder to pull off.

Meanwhile, there is the ongoing dance over net neutrality, and whether the FCC will reclassify broadband providers as so-called Title II common carriers, which, for now, is the only legal path to prevent internet companies — including Comcast and Time Warner Cable — from giving special treatment to some websites over others.

After the White House delivered an unexpected declaration of support for Title II in November, the FCC is expected to go forward with the reclassification process early in 2015. The plans to do so, however, are already drawing howls of protest and political shenanigans from the telecom giants, including Comcast. As a result, a decision to block the merger would make Comcast a double loser, and potentially lead the company to seek political payback against the rest of Wheeler’s agenda. (For now, however, the outcome of the Title II is still up in the air pending the FCC’s decision and recent proposals for a new type of net neutrality legislation.)

A final piece of the political puzzle related to the merger lies with the Justice Department, which could offer the FCC important covering fire but has yet to do so.

Specifically, the Justice Department could declare that it regards the merger as a violation of antitrust laws, and that it intends to sue under the Clayton Act. The legal case for a lawsuit appears to be strong, and the mere threat of legal action would likely be enough to scupper the deal (as occurred when AT&T sought to acquire T-Mobile). But for now the file still lies in the FCC’s lap, in part because it can stop the merger simply by not acting.

Under the law, the FCC must conclude that a cable merger benefits the public before granting approval. In the case of Comcast and Time Warner Cable, the benefits are far from clear, which means the agency can stop the merger by demanding a sky-high host of concessions or simply by sitting on its hands.

Doing either of those things, however, would require Wheeler to absorb the full political backlash, which is why he may be waiting to see if the Justice Department will weigh in.

The end game

Right now, the proposed merger between Comcast and Time Warner Cable still stands a good chance of going through. Yoo, the law professor, and people at Comcast acknowledge that its prospects are not as rosy as before, but are ultimately optimistic about its chances.

The final outcome, though, is likely to be determined by a combination of politics and straight-up policy analysis. At Gigaom, the editorial staff is opposed to the merger on the grounds that it will diminish competition in the market for broadband, and allow Comcast to shoehorn the new era of online entertainment into the old bundle model of cable TV.

But these considerations may not be determinative. The ultimate decision, which is likely to come in February or March, must be made by Chairman Wheeler, and will be shaped in large part by the degree of support he receives from the Justice Department.

Federal Communications Commission (FCC) Chairman Tom Wheeler testifies before the Communications and Technology Subcommittee on Capitol Hill in Washington, DC, May 20, 2014.    (Photo by Jim Watson/AFP/Gett

Federal Communications Commission (FCC) Chairman Tom Wheeler testifies before the Communications and Technology Subcommittee on Capitol Hill in Washington, DC, May 20, 2014. (Photo by Jim Watson/AFP/Gett

Comcast-TWC merger delayed, FCC says 7,000 docs wrongly held back

Comcast’s plans to swallow its largest rival Time Warner Cable has suffered another setback as the FCC announced Monday it would once again halt its “shot clock,” which is the 180-day time period during which the agency seeks to complete its review of proposed mergers.

In a letter published on Monday, the [company]FCC[/company] said it had to impose the delay upon discovering that Time Warner Cable improperly classified more than 7,000 documents as attorney-client privileged.

The misclassification, which the FCC says it discovered in early December, meant that the agency has not been able to properly review aspects of the proposed merger, which has significant implications for consumers and for both the telecom and entertainment industries.

As the FCC explained, the delay has meant that the agency had to conduct portions of its review process anew:

The effect of these late disclosures has been to slow down the Commission’s review of the Comcast/TWC/Charter transaction, in particular because sections of the review that staff had thought were complete now must be reopened to take account of the additional documents that have been disclosed.

From the letter, it appears that [company]Time Warner Cable[/company] held back the documents in the first place by designating them as attorney-client privileged, which companies can use to withhold documents in a legal or regulatory matter. The privilege can only be invoked in very specific circumstances (typically when a lawyer is providing advice to a client), however, and a company must still put the documents in questions on a list it shows to the other side.

While the process of designating documents as attorney-client privileged can give rise to disputes, it is unusual for such a large number of documents to be misclassified.

The mistake has drawn what appears to be a rebuke by the FCC in its letter (emphasis mine):

While the Commission can understand and accept that minor errors can occur when preparing both documents for production and privilege logs; it expects applicants to promptly correct errors, without prompting, when they occur. Here, however, the magnitude of the errors, with respect to both the document production and the privilege log, is material and the delays in rectifying them were substantial so that the tardy productions have interfered with the Commission’s ability to conduct a prompt and thorough review of the pending applications

The upshot is that the merger review process will be delayed by another three weeks until January 12, 2015, according to the letter.

This delay comes after the FCC stopped the shot clock in November after content companies, including [company]Disney[/company] and [company]Viacom[/company], went to court to prevent disclosing sensitive contracts as part of the merger review process.

When [company]Comcast[/company] announced the proposed merger in February, executives predicted that the deal would go through by the end of the year. The latest delays do not necessarily mean the deal is in trouble, though anti-trust experts generally agree that the longer a merger review draws on, the less likely it is to go through.

Meanwhile, the FCC also said the shot-clock delay does not affect a Tuesday deadline by which parties interested in the merger must submit reply comments.

Here’s Monday’s letter:

FCC Letter Re Shotclock

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T-Mobile will pay $90M over bogus charges on customer bills

The FCC on Friday announced a $90 million settlement with T-Mobile, making it the latest phone carrier to pay a penalty for “cramming,” which involves adding unauthorized charges to customers’ bills for subscriptions or “premium” text message services.

Under the terms of the settlement, T-Mobile will pay at least $67.5 million to fund a program for consumer refunds, plus another $18 million to state governments and $4.5 million to the U.S. Treasury.

“Yet again we are faced with a phone company that profited while its customers were fleeced by third parties who placed unauthorized charges on their phone bills,” said Travis LeBlanc, Chief of the FCC’s Enforcement Bureau.  “And once again the FCC is standing up for those customers.  Today’s settlement holds T-Mobile responsible for its billing practices and puts money directly back into the pockets of American consumers.”

The FCC’s press release says current and former T-Mobile customers can apply for refunds at www.tmobilerefund.com, though the website doesn’t appear to be working yet. Once it is up and running, it is likely to mirror a similar site where consumers who were bilked by AT&T over cramming can fill out a claim.

The T-Mobile news comes day after news that Sprint reached a similar cramming settlement with the U.S. Consumer Financial Protection Bureau.

In all the cramming cases, consumers were typically charged $9.99 from third parties such as astrologers or celebrity news sites, often without their consent. According to the FCC, the phone carriers, which earned a cut of the proceeds, effectively looked the other way and continued imposing the charges even though they should have known they were not legitimate.

Net neutrality’s cost to consumers pegged at $17B — or zero

After a dramatic shift in the debate over net neutrality last month, many expect the FCC will reclassify internet providers so as to bar them from giving special treatment to some websites over others. The question now becomes how much (if at all) the agency’s decision, which turns on an arcane process called Title II, will cost consumers.

Depending on who you ask, the answer is that Title II, which would treat internet providers akin to public utilities, will be ruinously expensive — or will have little financial impact at all. Among the Cassandras, you can count Republican FCC Commissioner Ajit Pai:

“It will cost $17 billion in new fees,” Pai told an audience of telecom lawyers in Washington on Friday, warning that consumers’ monthly internet bills are set to soar.

Pai’s number, which has also popped up on the Wall Street Journal‘s editorial page and in other right-leaning outlets, is lifted from a purported study by the Progressive Policy Institute, a think tank that has reportedly taken funding from [company]AT&T[/company].

The crux of the PPI study is that state and local governments will seize on the Title II legal regime to impose a bevy of new internet taxes, and that the FCC will soon apply a levy known as the Universal Services Fund levy to internet users.

The $17 billion figure, if accurate, provides additional ammunition for companies like [company]Comcast[/company] and [company]AT&T[/company], which are lobbying fiercely to stop net neutrality. The companies have already claimed that the new legal classification will dissuade them from investing in new internet infrastructure (though the $41 billion the industry just spent on spectrum casts doubt on that claim).

Like so much else in the pitched debate over net neutrality, however, the $17 billion number may have been ginned up for political purposes. According to Free Press, a nonpartisan advocacy group for open internet, the figure represents a misleading worst-case scenario that will never come to pass.

As the group points out, reclassification does not appear to require any new consumer fees. Such fees, it they do appear, will instead be the result of a separate set of decisions by the FCC and various governments.

Two different debates

To understand the fuss over the alleged $17 billion of new consumer costs, it’s helpful to recognize that the current debate over the internet is actually two debates: the first turns on net neutrality; the second turns on what sort of taxes and fees should apply to the internet. And one debate is not intrinsically tied to the other.

In the case of net neutrality, an FCC decision to reclassify internet providers as “common carriers” under Title II would trigger a new set of regulatory obligations. But the agency has the power to immediately excuse the companies from many of these obligations — a process called “forbearance” in telecom parlance.

Already, the agency has signaled that’s exactly what it plans to do. If the plan goes ahead, broadband providers will be barred from providing “fast lanes” for select websites, but will also get a pass from antiquated portions of the reclassification law. For consumers, no new broadband fees spring into place if the FCC waves its regulatory wand and turns internet providers into common carriers.

But that doesn’t end the larger concerns over fees and taxes, or eliminate conservatives’ fear that consumer internet bills will soon be filled with the same maddening series of charges that appear on their phone bills.

The outcome of this debate will turn not to Title II, but on issues tied to the FCC’s general powers over telecommunications and, to a large part, on whether Congress decides to extend the Internet Tax Freedom Act, a law that forbids states and local governments from taxing internet services. That law, known as ITFA, will expire on December 11 and, unless Congress renews it, consumers could get hit with all sorts of charges no matter what the FCC does with net neutrality.

As for the FCC adding charges to broadband bills, the agency already has the power to do so under the Universal Service Fund. This is a levy that has appeared on consumers’ phone bills for decades, and is spent on things like subsidizing phones for low-income Americans, school broadband or building telecommunications infrastructure in rural areas.

Collecting and spending the fund is a policy decision for the agency that is unrelated, however, to net neutrality.

“In the short term, nothing changes the next day when broadband gets declared Title II,” said Harold Feld, a lawyer with the advocacy group Public Knowledge. “On the Universal Service Fund, the FCC already has a proceeding on USF reform going and would need to have further proceedings on USF to determine how to apply the statute.”

A source close to the agency, meanwhile, said that if the FCC does decide to apply the Fund levy to broadband, it won’t necessarily mean that consumers’ overall expenses will go up. As it stands, a nonprofit corporation decides how much the Fund requires every quarter (the most recent amount was $16.1 billion), and the FCC then instructs a variety of companies to pay into it. If the list of contributors is expanded to broadband companies, that means that consumers could see new charges appear on their internet bills but, at the same time, see the same charge (currently $1.23 per month in my case) decrease on their phone bill.

The bottom line is that broadband users could see new fees and taxes on their internet bills in coming years, but that’s hardly a sure thing — and, more importantly, the outcome will have little to do with whether or not we have net neutrality.

$41B auction shows net neutrality is no threat to investment

When President Obama called for net neutrality this month, AT&T said the sky would fall. It warned that a policy banning internet providers from giving special treatment to some websites over others would lead companies to stop investing in new network capacity. So much for that.